High Grain Prices and the Livestock Industry

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There is no doubt that with the crop reports, continued demand for commodities by the emerging BRICS nations, and the possibilities of additional stimulus by the Federal Reserve, livestock and poultry agriculture are being challenged.

The magic level of $8/bu. corn and other inflated input costs can place even the most efficient producer in the protein industry in dire straits. In my travels, there is discussion that the integrators are also facing additional financial and economic stress. This has resulted in resources moving out of the livestock industry as liquidity and equity are being drained.

Initially producers who specialized in these industries were victims of the high input costs. Many of these operations were large dairies and, to some extent, poultry and hog businesses.

Now the prolonged high prices are draining equity from more diversified grain and livestock farms through cash flow losses. The saving grace has been strong farmland and real estate prices. High commodity prices and low returns on opportunity investments, which have appreciated land prices, resulted in strong balance sheets on paper. Any extended downturn in the grain commodity markets would play havoc on these land values, resulting in a less attractive balance sheet.

Recently, two producers I talked with on the livestock side have sold land at inflated prices to provide cash flow for their fledgling livestock businesses. The main culprit was high grain prices to the tune of $500,000 in losses over a five-year period.

In the long run, the foundation to an economically sound grain industry is a financially viable livestock industry in North America. Only time will tell whether livestock and poultry producers will make the necessary adjustments to keep their economic heads above water.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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